George Soros made billions from savvy currency and equity trades over the last few decades, and his Soros Fund Management firm just disclosed some fascinating details about what it owns. Specifically, the company revealed it now owns a put option covering 2.1 million shares of the SPDR S&P 500 Exchange Traded Fund (SPY). That was more than double the 1-million-share option position his firm held in the fourth quarter.

Put options give you the right, but not the obligation, to sell an underlying asset at a specified price. The value of that right goes up if the asset falls. Or stated another way, Soros is betting big that the S&P 500 will tank.

Another super-wealthy investor believes bullion is a much better bet than shares.

Calls are the opposite of puts. They make you money when the underlying asset rises. Plus, Soros bought $264 million shares of leading gold producer Barrick Gold (ABX). Those moves signal that yet another super-wealthy investor believes bullion is a much better bet than shares.

Frankly, I’m betting with the billionaires – maintaining a very cautious stance in stocks, fixed income, and other markets, and I’m staying bullish gold. If I’m going to own a stock, it better have a strong Weiss Rating, generous yield, solid underlying fundamentals, and/or relatively low volatility. Those are the kinds of names that have been leading this market all year, and I don’t expect that trend to change.

If you’re looking for more details about my views and investment ideas, by the way, I would definitely check out the Money, Metals, & Mining Cruise. It’s only two months away now, but there’s still time to grab your spot.

“Frankly, I’m betting with the billionaires.”

To recap: The cruise is sailing from Anchorage to Vancouver on July 10-17, 2016 aboard the Crystal Serenity. We’re also going to have a one-day investment seminar in the city of Vancouver after we dock. You can get more details here. Or call 800-797-9519 and ask for the special rates that apply to the Money, Metals, & Mining cruise.

Our Readers Speak

Meanwhile, you had plenty to say on the subject of stock buybacks, and on what declining buyback activity could do to the stock market.

Reader Richard K. focused on the negatives of the recent buyback wave, saying: “What is the rationale of share buybacks in today’s market? Is there any long-term value for the shareholders when a cash-rich company issues billions in new long-term debt? Just because it’s more cost-effective to issue new debt at current record low interest rates than it is to bring in the equivalent in cash from overseas accounts and be forced to pay a significant premium in taxes?

“Does it help a company to be more productive and innovative when billions are redirected to buy back stock rather than investing in new plants, equipment, R&D, etc. for the sole purpose of reducing the number of shares to improve EPS and other Wall Street metrics that are based on the number of shares outstanding?

“Seems to me that the purpose of share buybacks is to get the short-term approval from the Street, while ignoring the longer-term impacts that may arise from misdirecting capital from productive investments to unproductive expenditures.”

But Reader Thomas countered by saying: “Some of the best minds are running these corporations that are buying back their own stock. These captains of industry have insight, experience, and know-how. The best place to put your money today is to buy back your own shares.

“In doing so, you take the capital out of the crooked hands of the banking cartel (think bail-in), and your own company acts as your own bank. Plus, if there is no demand, why invest in more plants and equipment?”

Of course, purchasing shares when they’re pricey is dangerous no matter who’s doing the buying. Reader Aaron highlighted that risk by saying: “Stocks are trading at very high P/E ratios. If buybacks continue to fall, EPS will also fall. Looks to be a good time to hold cash or go short.”

Reader Nick also weighed in on the direction of the stock market, sharing these comments: “If buybacks are $2 trillion since 2009, and unicorns and trash stocks have taken pretty big hits, then who is left to sell? I would offer that this at least gives some idea of why it’s so quiet (before a storm).

“So, I say the next rout of selling is going to be panic based. What goes up soooo fast must come down just as fast. I would also offer that there are plenty of Swans – pick your shade – to get that ball rolling. It could be ugly now through October.”

Lastly, Reader Tom admitted he is essentially throwing up his hands: “With so many opinions out there, I really do not have a clue where any of these markets are headed.”

To Tom (and everyone else), I hope I’ve been as clear as I can about where I stand. The “nutshell” version is: Stocks look vulnerable because the credit cycle has definitely turned for the worse. The economy increasingly looks to be slumping toward recession. And all the happy talk and funny money that helped artificially prop up markets for the last 6.5 years is no longer working the way it used to.

Whether you agree or disagree, I encourage you to take a few moments to post your comments at the website below.

Other Developments of the Day

Housing starts bounced back somewhat in April, rising 6.6% to a seasonally adjusted annual rate of 1.17 million. But building permits climbed only 3.6% to 1.12 million, missing expectations.

At the same time as the government released those underwhelming construction figures, it said the Consumer Price Index jumped 0.4% last month. That was the biggest increase in more than three years. The “core” CPI gained 0.2%, in line with forecasts.

I’ve been warning about banking sector woes for a while, and I’ve been singling out the European banks as particularly vulnerable. Now, even the European Central Bank admits they’re in trouble. The ECB’s Chief Economist Peter Praet just warned that European financial institutions face a “severe profitability shock” and that they’re suffering from a “lack of consolidation, overcapacity, and legacy problems.”

While many retailers have been struggling, Home Depot (HD) managed to buck the trend in the first quarter. The home improvement retailer reported $1.44 per share in earnings, above the average forecast of $1.35 per share. Revenue rose 9% to $22.8 billion. But the stock tanked anyway amid worries that HD’s best days are behind it.

So what do you think about the crop of economic data today? How about the troubled European banks? And do you think the latest earnings figures make Home Depot a better buy or sell? Hit up the comment section and let me know.

Until next time,

Mike Larson

Recommended Articles by Mike Larson:

Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.

A put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.

ThomasTuesday, May 17, 2016 at 5:16 pm

The hedge of last resort remains Gold! It has been so for the last 3000 years! When times are troubled, unsure, in the brink of collapse, Gold has always be the great security and constant value. “The man with the Gold makes the rules” is still true today as it was a 1000 years ago! When will we learn??

GordonWednesday, May 18, 2016 at 1:41 am

Thomas the simple answer is never. Governments, The Fed, Bankers, Wall Street are doing their utmost to belittle,demean, talk down, relicalize dismiss gold saying its only good for a door stop. The other day when the Comex opened someone dumped 2.5 million ounces of monopoly paper gold on the market and it went down like Niagara Falls. This trading in paper chits on gold should be stopped but our crooked governments and the SEC look the other way because of their special interests. On the other other hand they are buying it up on the QT. They talk it down to buy it as cheap as possible. What is catching the average persons eye is the fact that Soros, Druckenmiller and other billionaires are making heavy bets on the yellow metal. Can these guys be wrong? They build their own markets.

JessicaWednesday, May 18, 2016 at 5:04 am

Right.

John FaschingTuesday, May 17, 2016 at 5:20 pm

I watched the market with greater and greater confusion. So, I am now in municipal tax-free bonds earning 4.75% and watch the interest come in each month on a laddered portfolio.
Right now the stock market is not an investment place, its a gambling place. FWIW

F151Tuesday, May 17, 2016 at 6:18 pm

John…..Munis are currently a casino too. I would look very carefully at where those bonds come from. Are any from places like Puerto Rico, Illinois, California, or NY…..? Or one of the many cities in trouble?

JimTuesday, May 17, 2016 at 8:07 pm

The Muni Market is not without risks. There are over 1,000,000 bonds from 50,000 issuers. Only about one per cent actually trade in a given year. That isn’t much in the way of liquidity. The rating system is very suspect. There are only 1600 dealers and only five account for half the trades. There is no set price. The spreads can be twenty times that of a stock. Like so many areas of investing if you know what you are doing you can do well, but it’s not easy. Jim

GordonWednesday, May 18, 2016 at 1:43 am

John F. Here’s hoping that the muni’s can some day pay back their debt obligation.

$1,000 gold™Wednesday, May 18, 2016 at 2:23 pm

when it comes to munis, obviously it’s important to pick financially sound cities. nonetheless, i’d still like to see how rising rates affect munis before i make a decision to buy.

$1,000 gold™Wednesday, May 18, 2016 at 2:27 pm

reits look more interesting than munis. check out tickers REM and NLY. the yields look especially good at around 10% and there appears to be more upside than downside in the price. at these rate, i could handle some downside.

Tony D.Tuesday, May 17, 2016 at 6:46 pm

It would be nice to know what S&P puts Soros owns, Strike Price and Date?

$1,000 gold™Wednesday, May 18, 2016 at 2:33 pm

me too. by the time we get the news these guys may have already closed out the trade. plus we never know if what they do is a hedge or a bet. mimic this guys and we could be wrong.

Chuck BurtonTuesday, May 17, 2016 at 9:24 pm

Observation: Inflation is the same thing as devaluation. It varies, though in terms of various determinants. For example, since 1971, when President Nixon took the dollar entirely off the gold standard, the Dollar has lost about 97% of it’s value against gold. An average production worker, in 2015, made about 5.2 times what he/she made in 1971, in Dollar terms, but if paid in gold would receive only about 1/6 as much as in 1971. It could be said that the worker has lost pay badly in gold terms. However, the Consumer Price index for all items, in 2014, was about six times what it was in 1970, so, in terms of living costs/salary, the worker only lost about 16% in that time, but that could be the difference between relative comfort and economic insecurity. Also, any inflation hits those on fixed income, which describes most retirees. Remember, the Boomers are largely retiring now, and their children are soon to retire. They still vote, however, and in large numbers, for the most part. The politicians need to remember that.

$1,000 gold™Wednesday, May 18, 2016 at 2:39 pm

then the converse must be true: deflation increases valuation? i’d say this is true, if you hold cash instead of assets. so i guess the opposite is true for inflation? it’s all relative to what you own, right? my cash inflates during periods of deflation, but my cash deflates during periods of inflation. the only thing we can control is what we own.

MonetTuesday, May 17, 2016 at 9:36 pm

Here’s the whistle! The SPDR S & P 500 Exchange Traded Fund is the only place to discuss and trade obligatory calls and puts over gold only.

F151Tuesday, May 17, 2016 at 11:04 pm

Here’s an interesting note:
According to the well-respected research firm DALBAR, Inc., the average investor in asset allocation mutual funds (which spread your money among a variety of classes) earned only 1.65% PER YEAR over the last three decades! These investors didn’t even come close to beating inflation, which averaged 2.6% per year. The average investor in equity mutual funds averaged only 3.66% per year – beating inflation by only 1% per year. (Was that worth the sleepless nights?)

JimTuesday, May 17, 2016 at 11:37 pm

Did it say where you would be if you had bought gold thirty years ago? Jim

$1,000 gold™Wednesday, May 18, 2016 at 2:44 pm

…verses an investment in an s&p index fund including compounding in a 401k. i can tell you who’d come out ahead without even looking it up.

GordonWednesday, May 18, 2016 at 6:55 am

Just another barf day. The Queen of England decked herself out in all her finery and put on her gold bejeweled crown and trotted off in her gilded carriage to parliament and gave her speech. What the speech said like so many times in the past “we will use an improving economy to improve the well being of workers and give them a better life” Off came the crown and it was put back in storage and she hopped aboard her gilded carriage and returned to her palace and all its finery leaving a bunch of meaningless words behind. Its the same old crap as in past years fast forward to today.

TSR2Wednesday, May 18, 2016 at 8:10 am

In the UK the big question BREXIT/Remain? The Government (Cameron) is desperate for a remain vote as we have a current account deficit (CAD) approaching £100bn per year and a fiscal deficit of over £70bn. Keeping the UK in the EC is like a lifejacket for Sterling, keeping it afloat. If BREXIT won Sterling is likely to tumble – Remain and it will keep it at its artificial level.
However, reality will take over at some time in the future. At present Sterling is being kept artificially high by foreign investors desperate to invest their money somewhere – frequently the source of funds is obscured. – £15bn per year into London residential properties. However, selling off assets is only stacking up problems for the future – increasing CAD as investors’ income flows out of the UK. Politicians are just hoping they can hold on and be first to the lifeboat when Sterling finally sinks. So, avoid cash perhaps.

Eagle495Wednesday, May 18, 2016 at 10:24 am

Here is something to consider……. Is it possible that the Billionaires are really considering the possibility that Drupmf takes the White House and they keep a Republican Majority in Congress?…… With the fighting between the Hillary and Bernie camps, there is a real possibility that the Democrats go to November split, or disgusted, even more so than the GOP, which allows Drumpf to get elected. And then he begins turning America into an even greater Utopia for the 3%, Ultra Rich Billionaires and life for the 97% gets even worse, which causes another Crash, even worse than 2007?

Remember:ALL OF THE STOCK MARKET CRASHES AND FOLLOW ON DEPRESSIONS IN AMERICA’S HISTORY, HAVE ALWAYS HAPPENED DURING THE WATCH OF CONSERVATIVE ADMINISTRATIONS AND CONSERVATIVE MAJORITY CONGRESSES……

$1,000 gold™Wednesday, May 18, 2016 at 2:56 pm

it is what it is. so you and i need to be like a zen budda and go with the flow. trump’s plan to increase spending and decrease taxes will act as a stimulus to the economy, at the expense of even more debt. plus, let’s not forget, we’re head towards full employment with a stock market that is fully valued. any stimulus now will just put us on a faster path to recession. find your chi, man, and invest accordingly.

Eagle495Wednesday, May 18, 2016 at 4:19 pm

Ya gold, I’ve done pretty well investing since the Republican Revolution… Out in 2000, back in 2002 and out in 2008 and back in once Obama was elected….. See, I still remember the days when you could invest long term when the Democrats were running the ship and that was HUGE…. That said, I tended to go to cash during the Republican Administrations as those tended to be flat or down periods… Really, check it out…. HInt: $10,000 invested in ONLY Democratic Administrations from 1029- 2012 rose to about $300,000!… During the same time Investments on ONLY Republican Administrations (about the same number of years) only rose to $11,000… Get my point?

$1,000 gold™Thursday, May 19, 2016 at 11:24 am

appears to me the economy has a life of its own, regardless of who’s elected, and we seem to elect people who fit the economy. so is it the economy who determines who’s elected? not the other way around?

GregWednesday, May 18, 2016 at 1:33 pm

Mike: “Put options give you the right, but not the obligation, to sell an underlying asset at a lower price. The value of that right goes up if the asset falls. Or stated another way, Soros is betting big that the S&P 500 will tank.”

Me:
Wow Mike, you just lost a great deal of credibility with that statement. Why would ANYONE want to sell an asset at a lower price? Isn’t the rule buy low and sell high? Your statement about Soros will win if the S&P tanks is correct, but the confusion about put options is pretty obvious!

Paul KindelWednesday, May 25, 2016 at 5:32 pm

Greg, I think you may have accidentally misquoted Mike…

Mike: “Put options give you the right, but not the obligation, to sell an underlying asset at a specified price.”

…Mike stated “specified price”, not “lower price” as in your statement Greg. Probably just an oversight, but it does make somewhat of a difference. Mike is correct in his wording about the put options.

Even so, if the strike price of those options are lower than the current price of the asset, buying those put options out-of-the-money like that would be far more profitable than buying puts that are near the current price. You might be selling the asset for a few dollars less, but you may have 10 times the number of shares to sell. Right now, an at-the-money SPY put of $210 strike in July goes for $4.09 while an out-of-the-money $190 strike can be had for $0.42. If SPY drops to say $180, the lower strike price put beats the higher one by more than 3 to 1.

Either way, I think Mike got it correct.

WayneWednesday, May 18, 2016 at 3:09 pm

The problem is not buybacks per se, but companies which either: 1) over leverage the company by using borrowed funds to buy stock, which can create a disaster if interest rates rise later; or 2) use buybacks to appear to decrease share ownership and then grant options to the executive suite in share amounts equal to, or more than, the shares purchased, thus effecting a wealth transfer from outside to inside shareholders ( a tactic which the SEC should outlaw as fraud)

RetaThursday, May 19, 2016 at 6:45 am

Of course soros is betting on it. He’s creating it. Why do you think he’s apparently not allowed in the UK. What he did there, in 1992, is what he wants to do here. He’s well on the way.

Russia has an international warrant out for his arrest. It’s not because he’s such a good, decent human being.